[This is the eighth article in a series about tax tips for small businesses and individuals.]
We probably don’t have to tell you – and you don’t have to tell your clients – how difficult it is to claim a deduction for medical expenses under current law. Prior to 2013, the deduction was limited to excess of your qualified expenses above 7.5% of adjusted gross income (AGI), a daunting threshold for most. And now the floor for medical deductions has been raised to 10% of AGI (remaining at 7.5% for taxpayers age 65 or over, but only through 2016).
This means it will usually take at least one significantly large expense to push a taxpayer over the deduction threshold. But it’s still possible and it doesn’t have to be a calamity either. In fact, the family might even benefit from some summer recreation at the same time.
Here’s the background information: To qualify as a deductible medical expense, the cost must be incurred primarily for prevention or alleviation of a physical or mental defect or illness. On the other hand, if the expense is merely beneficial to your general health or well-being, you can’t deduct the cost. For example, if you install a swimming pool for your children to frolic in during the warm weather, no deduction is allowed, even though they’re getting some much-needed exercise away from their video games and computers.
However, there’s a silver tax lining if the pool is needed by a family member to alleviate arthritis or some other specific illness. For a medically-necessary improvement made by a homeowner, the deductible amount is equal to the cost above the corresponding increase in the home's value. In addition, the annual maintenance costs associated with the pool — chlorine, repairs, utilities, cleaning services, etc. — also qualify for the deduction. Note that the entire cost of a qualified improvements, plus the maintenance costs, is deductible by tenants.
Suppose that your client has an AGI of $150,000 and $12,000 in unreimbursed medical expenses in 2014. His doctor has ordered him to start swimming laps in a pool to improve a heart condition. The client builds an in-ground pool in his backyard for $25,000, but a local realtor says it will increase the value of the home by only $15,000. Previously, the client could not claim any medical expense deduction because the $12,000 total is less than 10% of his AGI, or $15,000. But when he adds the $10,000 write-off for pool, the total increases to $22,000. Now he can deduct $7,000 in medical expenses ($22,000 – $15,0000) on Schedule A of Form 1040.
A few other common examples of home improvements that may be deductible as medical expenses are air conditioning installed to alleviate a child's asthma, an elevator constructed for an adult who can’t walk up stairs and special modifications for a disabled person. Again, no deduction is allowed for purely cosmetic changes.
Best approach: Obtain a written appraisal from an independent real estate professional establishing the increase in a home's value due to an improvement. Also, if a physician prescribes a home improvement to alleviate or treat a medical condition, get the recommendation in writing. Keep these documents on file in case the IRS ever challenges the deduction.
Thanks for reading CPA Practice Advisor!
Subscribe Already registered? Log In
Need more information? Read the FAQs
Tags: Income Tax, IRS
